The IRS has issued Notice 2010-80, which expands on Notice 2010-6 and provides methods for employers to correct certain documentary failures under section 409A of the Internal Revenue Code.
Brief Overview of Notice 2010-80
Notice 2010-80, 2010-51 I.R.B. 853 (Dec. 20, 2010), allows employers to correct a number of documentary failures under section 409A arrangements. This Notice:
- Clarifies and expands the types of plans eligible:
- Includes linked nonqualified and qualified plans provided the link does not affect time and form of payment
- Includes stock appreciation rights that were intended to comply with section 409A rather than be exempt
- Relief from the requirement that employees file notice of corrections with their taxes for corrections made in 2010
- Relief from the requirement that employees file notice of corrections with their taxes for corrections made with respect to payments conditioned upon a release through 2012
- Relief from the requirement that an employer provide certain information to employees for certain corrections under
Severance Release Issues
Severance agreements frequently condition payment upon a former employee signing a release of claims. Section 409A permits a payment to be made within 90 days of a permissible trigger, such as separation from service, provided the employee does not control the year of payment. Thus, many severance agreements provide payment will be made within 90 days after a former employee’s separation from service after the former employee signs a release (or after the employee has signed a release and the rescission period has expired). The IRS is concerned that this provision may allow such a former employee to determine the year of payment for the severance.
Fortunately, Notice 2010-80 provides additional relief. Notice 2010-80 provides that amounts paid under this type of provision on or before March 31, 2011 the payment will not be treated as failing to comply with section 409A. After March 31, 2011, Notice 2010-80 provides an additional correction method for such a provision. The correction allows an employer to amend the agreement or plan to state that if a participant is to be paid within 90 days and the 90-day payment period winds up spanning two years, then the employer must make the severance payment in the second year. Notice 2010-80 also provides an extended transitional relief period through December 31, 2012.
This additional guidance is helpful, but areas of uncertainty remain. In particular, relief would be helpful with respect to linked nonqualified and qualified plans where linked time and form of payment issues may not have been recognized.
If you have questions about Notice 2010-80, Notice 2010-6, or section 409A, please contact the attorney in the Benefits and Compensation practice group with whom you work.